Premium Collection Using Binary Options


#1

By Darrell Martin

When trading Nadex binary options, you may have heard of premium collection and wondered how that is accomplished, especially in the forex markets. This article will explain one strategy you can utilize in your trading.

To collect premium using a forex binary option, one possible strategy is to buy or sell Deep In The Money (DITM) contracts. These are contracts that are currently true.

For example, if the GBP/USD is currently trading at 1.2340, a DITM contract could be 1.2300, with a buy price of 82.50. The risk is high at 82.50 and the potential reward is 17.50. With Nadex binaries, the risk is limited, but you could limit the risk further by exiting when the market hits the strike price. You would exit with a loss of $30-40 instead of the full $82.50.

Here’s an opposite, yet similar example. Still looking at the GBP/USD market, currently trading at 1.2340, let’s suppose you believe the market is going to go down. A DITM strike would be 1.2380 sold for 22.25. The risk on this contract is $77.75. Again, this is high risk, but can be limited.

Both of these premium collection trades can make money if the market moves three ways. On the buy trade, as long as the market goes up, stays flat or goes down a limited amount, the trade will profit as time expires. At settlement, as long as the market is above 1.2301, it is profitable.

On the sell trade, as long as the market goes down, stays flat or only goes up a limited amount, the trade is profitable as time expires. In this case, when at settlement, you want the market to remain at or below 1.2380 in order to be profitable.

Deep in the money binaries are already a true statement when the trade is entered. The market must simply continue in its current trend, stay flat or only slightly retrace and profit will be attained while time expires.

The goal on a Premium Collection Trade is to get in, collect as much of the premium as possible and get out. These trades do not need to be held until expiration. The trick to remember for this kind of trade is that the trader can collect their premium as the binary’s time expires. Care should be exercised to further limit losses, as mentioned above.